Friday, December 31, 2010

Confusion Over Apple As An Investment

I've noted with interest this past week's flurry of comments about Apple as an investment for 2011.

In my own equity strategy, which is outperforming the S&P for the year by roughly 25% to 11%, Apple would now be a holding in four of the currently active six portfolios. Apple trails the index slightly in two recently-formed portfolios, and outperforms in the other two.

While I can't predict with certainty, I'd expect that Apple will be part of the January 2011 equity portfolio, as well.

The nearby price chart for Apple, Google, Microsoft and the S&P500 Index reveals how dominantly the former has outperformed the latter three entities, Google and Microsoft being two of the more popular alternates in the technology sector.

What surprised me somewhat is how comparatively anemic Google's performance has been, when viewed with Apple's. The S&P's and Microsoft's track records for the past five years isn't all that unexpected.

Listening to many pundits, it's tempting to believe that Apple's performance is a purely technical feat, with a parabolic curve that must descend soon.

However, on the several bases in my quantitative equity portfolio selection process, Apple probably has some life left in it. Moreover, I've seen broad consensus on prior growth equities be wrong. For example, in 1998, Dell was viewed as overpriced and unable to sustain its then-torrid fundamental growth. It ended the year as one of the S&P500's top ten total return issues, so I was thrilled to have followed my portfolio selection process and held Dell for the entire year.

Ironically, as I observed back in the late 1990s, the bulk of the analyst community views equities in aggregates, often with some technical perspective. Thus, the individual merits of many attractive equities are lost amidst broad comparisons and conventional 'rules of thumb.'

Thank God for that.

As I consider why Apple, with its lofty share price and steady march upwards in price since January of 2009, may continue to outperform the S&P500, several reasons come to mind.

One, of course, is the firm's clear, successful focus on consistent innovation and evolution of well-received products. Those products have achieved high brand preference status. Additionally, they are typically in price ranges that have made them less vulnerable during the recent US recession and continuing economic weakness. With Steve Jobs' continued leadership, the firm may outperform expectations for a little while longer still.

And, finally, there's something which many investors fail to grasp. That is, even broadly-followed, popular firms can outperform. What is required is unexpected excellent performance. Firms like Microsoft, Dell, Kolhs, in the past, and, currently, Apple, have achieved this. It can never last forever, but it can often outlast ill-informed, generically-based expectations.

What Google does seems to be less unique with time, while Microsoft has been mismanaged for over a decade, with no sign of significant change in that important parameter.

The bottom line for me is that I don't subjectively select equities. But I can and often do interpret why my quantitative approach selects those equities which appear in portfolios. And from post hoc, informal inspection, it's easy for me to see why none of the recent portfolios have held Google or Microsoft, while many have included Apple.

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